Countdown joins Foodstuffs in rejecting case for forced split

Wednesday, 15 September 2021

Commerce Commission commissioner John Small said in July last year that the regulator was not playing a game with supermarkets.

Countdown has joined rival Foodstuffs North Island in rejecting a Commerce Commission conclusion that the supermarket industry is too profitable and breaking up the companies should be considered.

The Australian-owned chain said in a submission to a draft market study that the watchdog published in July, that it was a “low margin business” and the commission had significantly overstated its returns.

Countdown said the commission had ignored the fact that food prices had “fallen in real terms” over time and were slightly below the OECD average if prices were adjusted to reflect the purchasing power of the New Zealand dollar, instead of just converted at market exchange rates.

The commission purposefully did not take the “purchasing power parity” (PPP) approach to comparing food prices, arguing that most grocery items were internationally-traded so the measure favoured by Countdown would not be appropriate.

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The price of physical goods generally, and not just groceries, can tend to rise at a lower rate than services, and therefore the overall inflation rate, which is usually put down to the propensity for labour costs to outstrip inflation.

But Countdown also submitted that its New Zealand operations were less profitable than its Australian arm, Woolworths, “which operates in a highly competitive market”.

Countdown says consumers should be told food prices have not risen as fast as inflation.

Countdown told the commission that “New Zealand market realities” meant there were high costs across the economy “and so New Zealand is an expensive place overall”.

The company joined Foodstuffs NI in accepting a commission proposal for a mandatory code of conduct setting out how supermarkets should treat suppliers.

It agreed that like similar codes in Australia and the UK it should be overseen by a “Government-appointed grocery ombudsman or adjudicator”.

But it rejected the case for “internationally unprecedented regulatory interventions” put forward as options by the commission, such as forcing the chains to separate their wholesale and retail arms or sell off stores to help make way for new entrants.

Countdown said that in its view the retail grocery market was “already competitive, and is becoming more so, organically, and without intervention”.

A forced split would have “unintended consequences” that would probably lead to higher prices and poorer outcomes for consumers, it said.

Commerce Commission chairwoman Anna Rawlings presents the commission's draft report into the grocery sector in July.

“It is likely to be the Kiwi consumer and taxpayer who ultimately bear that cost, and therefore it’s our view that other actions should be considered first.”

It said would be “open-minded” to future discussions about it voluntarily supplying groceries to rival retailers, if there was a view that was necessary after a “sufficient passage of time” to assess whether other measures to increase competition had worked.

But at the moment its supply chains were “not set up” to supply third parties, it said.

Countdown said it would “support a regime that makes exclusivity provisions in supplier contracts unenforceable except where they are reasonably necessary for legitimate business purposes”.

It also joined Foodstuffs in agreeing to wave goodbye to clauses in land covenants that often restrict competitors from trading near supermarkets, suggesting they be made legally unenforceable.

Despite the supermarket chains’ concerns, Consumer NZ said it considered there was merit in requiring supermarkets to supply other retailers with groceries at “competitive wholesale prices”.

It said it was unlikely that voluntary arrangements would be effective, so either an “enforceable access undertaking or a regulatory access regime” was likely to be required.

Former Telecommunications Users Association chief executive Ernie Newman – who was a key figure in telecommunications reforms that eventually led to the break-up of Telecom and a former executive director the Grocery Manufacturers’ Association – also backed structural reforms of the industry.

He told the commission in a submission that telecommunications and grocery distribution were both important essential services that had shown a propensity to restrict competition.

The centralisation of groceries distribution had led to “an extreme concentration of market power” that outweighed any cost-savings to consumers, he said.

“Consumers deserve better than a grocery sector that has become a playground for creative marketers bent on bringing maximum confusion to what should be the simplest of choices,” Newman said.

That meant regulation, he said.

“To grow their businesses our innovators require a vibrant and competitive domestic distribution structure, so they have a next step when they outgrow their local farmers market but remain too small to export. That steppingstone role of supermarkets is crucial.

“The commission successfully solved that similar issue in telecommunications. It must accept the same challenge here,” Newman said.

Structural separation of supermarkets’ retail and distribution arms was “by far the best of the available options”, and the commission should move straight to that, he said.

The “only losers” from that having occurred in the telecommunications market were Telecom shareholders, he said.

“In my opinion direct government entry into the market … should be a last resort if structural separation did not deliver the desired result.”

A new lobby group called Monopoly Watch NZ was also among the many individuals and organisations that made submissions to the commission.

It is understood to be comprised of a group of high-profile individuals who intend to keep their involvement in the lobby group anonymous.

It said New Zealand had had “one of the weakest competition legal frameworks in the OECD” for decades.

“Foodstuffs was correct in its legal submissions from 2001 to 2005 that the merger of Foodtown and Countdown would substantially lessen competition and create downstream problems in the sector,” it said in its submission.

“The commission must respect the work of its analysts, researchers and managers who delivered a well researched 517-page draft report and recommend to the Government that it splits both Woolworths NZ’s operation into two parts by unwinding the 2005 merger, and splits Foodstuffs North Island and South Island,” it said.

Monopoly Watch NZ said the commission “needs to be complimented for the way it backed-out goodwill from Countdown’s balance sheet” when working out its returns.

“This is a major signal to investors the commission is alert to balance sheet bullshit from incumbent monopolists and does not believe there is a property right to a monopoly rent,” it said.